European Union Moves Toward a Bailout of Greece

Monday

The first bailout in the euro’s history is expected to involve loan guarantees from the German and French governments.

LONDON — Greece, in the midst of a financial crisis, is planning a bond deal this week that depends on a lot of things going right.

For one, other members of the European Union — much as they would prefer not to — are discussing ways to show that they will stand behind Greece. In recent days, the outlines of a rescue plan have started to come together, probably involving loan guarantees from the German and French governments to encourage their banks to buy Greek debt.

But even as the negotiations continue, the bloc insists that Athens impose further austerity measures, in part to overcome political opposition in Germany to providing aid to what it sees as the spendthrift Greeks.

The markets remain skittish. For weeks, the Greek government, which faces 23 billion euros ($31.3 billion) in debt repayments in April and May, has been testing investors’ diminishing appetite for Greek bonds via a proposed three billion to six billion euro ($4 billion to $8 billion) 10-year offering that it hopes to bring off at an interest rate in the 6 percent range.

While the offering is fairly small, its significance for Europe and the bedraggled euro is great.

“This is not a Greek crisis anymore,” said George Pagoulatos, an economics professor at Athens University. “Europe realizes that something bigger needs to be done before things get out of control.”

While bankers and analysts expect the deal to come to the market this week, events are so fluid and uncertain — it is not even clear yet which banks will syndicate the deal — that further delays are also possible.

With no structure in place for dealing with a threatened default within the 16-nation euro zone, officials are making up the rules as they go. That means politics, as much as economics, is determining the outcome of the worst crisis in the decade-long lifespan of the euro, whose value fell to $1.36 on Friday from $1.51 in late November.

European officials say the purchase of Greek bonds by government-owned lenders like Germany’s KfW Bankengruppe — backed by German government guarantees — will probably be part of any solution and has been under discussion for three weeks.

Other alternatives, including involving more countries in the euro zone, are also being discussed. France’s state-owned bank, Caisse des Dépôts et Consignations, may be involved, a Greek newspaper reported Saturday, while France’s finance minister, Christine Lagarde, told Europe 1 radio on Sunday that there were “a certain number of proposals in the euro zone, involving either private partners or public partners or both.”

In preparation for the bond deal, Deutsche Bank’s chief executive, Josef Ackerman, met Friday in Athens with Greece’s prime minister, George Papandreou. On Monday, Olli Rehn, the European Union’s commissioner for monetary affairs, will be in Athens for several days of meetings and to give a Brussels imprimatur to the latest package of tax reforms and public spending cuts that Mr. Papandreou is expected to present to Parliament on Tuesday or Wednesday.

Only then is the bond deal expected to go through, bankers say — with the hope that the show of European support will allow Greece to sell its paper beneath the 7 percent rate that investors are now demanding.

Much of the demand is expected to be met by German and French government-owned banks, which already own significant amounts of Greek debt, as well as government-controlled institutions in Greece like Hellenic Postbank and the Agricultural Bank of Greece.

“The focus is on Olli Rehn and the announcement of the austerity measures,” said Anthimos Thomopoulos, the chief financial officer of the National Bank of Greece, who added that he had not been informed of the timing of the deal. “If there is a bond deal, it will be after the austerity measures.”

Bankers say it is important that the Greeks not buy more than 30 percent of the deal to show markets that more discriminating outside investors also support it.

For months, Greek banks have been among the largest buyers of Greek debt — Greek sovereign bonds are 16 percent of the National Bank of Greece’s assets, for example — because they could use these securities as collateral at the European Bank for desperately needed funds.

But Greece can no longer pass on its debt to compliant domestic banks. It will need to win back longer-term investors like pension funds and insurance companies that have retreated to the sidelines recently as the value of their bond holdings has fallen.

To a large extent, political intrigue has overshadowed the offering. Germany is reluctant to sanction any bailout knowing that, as the euro zone’s biggest economy, it will bear the brunt. But France and Germany also believe that any recourse by Greece to the International Monetary Fund would damage the euro’s prestige and highlight their inability to sort out internal problems.

“The Germans will not put a euro on the table until there is a credible austerity package,” said a European official, speaking on condition of anonymity because of the delicacy of the issue.

Simon Tilford, chief economist at the Center for European Reform, said that France and Germany recognized that some form of bailout was inevitable. But, he said, for a bailout to be sold to a skeptical German public, the Greeks first “have to be seen to be suffering.”

The Greeks have already agreed to freeze wages, cut bonuses, crack down on taxes and push back the retirement age to 63 from 61 by 2015. European Union officials have made clear that they do not think these will reduce the budget deficit to 8.7 percent from 12.7 percent this year as planned.

Additional measures will probably include an increase of two percentage points in the 19 percent value-added tax, higher fuel prices and the possible abolition of one of two additional months of pay received by public sector workers and by employees of many private companies.

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